What is Franchise Tax?
In nutshell, Franchise Tax is a fixed fee for companies to pay to maintain their businesses in Delaware, in a sense the cost of having a business in Delaware. It is essentially a form of state tax imposed by the state of Delaware for the right to own a company in Delaware. This tax is not calculated based on any income or company activity.
It is not dependent on and calculated based on the activities or the income of the business, it is -as mentioned, fixed amount to keep the business operating. Therefore, it is more of a fee rather than a tax which is required by the state of Delaware to maintain the good standing status of the company.
In this connection, companies that are incorporated in Delaware, regardless of where the company conducts business, must file an Annual Franchise Tax Report (only corporations) and pay Franchise Tax for incorporating in Delaware. Companies incorporated in Delaware but not conducting business in Delaware are not subject to corporate income tax but do have to pay Franchise Tax.
What is an Annual Franchise Tax Report?
It aims to report the workplaces, names, titles, and addresses of all managers and the name, title and address of an officer. The State of Delaware also requires current figures for gross assets and issues shares.
When to Pay and File?
All companies, regardless of their types, pay their taxes for their previous calendar year. The deadline for the payment, on the other hand, depends on the type of business.
For “Corporations”, the deadline is the 1st of March every year. If the amount has not been paid until this day, there will be a delayed penalty of $125 and 1.5% interest for each month the payment was delayed. Furthermore, if the Annual Report and taxes are not filed and paid by March 1 the following year, the corporation will be declared inoperative and void. In the next calendar year, you have to file what’s called a franchise tax, or an annual report from the previous year. Therefore, by March 1st of the year following, you need to file a report listing all the directors the company at the time you are filing this report along with one officer and their addresses.
For LLCs, the deadline is the 1st of June every year. The period is also the same for Limited Partnerships. If the amount has not been paid until this day, there will be a delayed penalty of $200 and 1.5% interest for each month the payment was delayed.
What to expect if you do not follow all these requirements?
In case of non-compliance, Delaware Division of Corporations will invalidate or cancel your company unless you pay your Delaware Franchise Tax and keep a Registered Agent actively.
Additionally, if you miss a Franchise Tax payment for your Delaware Corporation, LP or LLC, or you do not file the Delaware Corporation Annual Report, it will always be in the records of the Delaware Division of Corporations. So, if someone investigates the company, a missed Franchise Tax payment exists in the company’s history. This may not be attractive to potential investors.
Furthermore, if you do not pay your Delaware Franchise Tax for three consecutive years for LLC/ LP (for two consecutive years for Delaware Corporations), the State of Delaware will put in a Cancelled/Voided status.
How to Pay?
You can also check for your current Delaware Franchise Tax information by clicking here. (This application is available daily between 8:00 am and 11:45 pm Eastern Time. Only use the English version of characters when entering data, otherwise, it may cause an inaccurate record on your Annual Report.) If you see that you will get a penalty and interest on your Delaware Franchise Tax, you need to contact with tax Department of the State of Delaware and pay your penalty and its interest.